Understanding Home Equity, Lines of Credit & Interest Rates

Homeowners in need of financial assistance face a variety of options to help them get some extra money for any project or need. One of the most popular options is to look into the equity of an owner’s home. Home equity is the market value of a home minus the debts owed against it such as mortgages and liens.

Owners with a significant amount of equity available in their home are often eligible to gain extra money by refinancing their homes to lower interest rates, giving homeowners access to a substantial lump-sum payment that is immediately available for usage.

Homeowners with significant amounts of equity in their home may also apply for a home equity loan or line of credit, an incredibly popular option that also allows homeowners to get the extra funds they require in times of need.

Understanding Home Equity Lines of Credit

A home equity line of credit can be understood by bringing it down to scale – it can be imagined as taking a cash advance against a credit card. Most home equity lines of credit are treated like a traditional bank account in the sense that recipients are often given a debit card or checkbook to manage their line of credit account.

Funds withdrawn from the account must be repaid like a standard credit card, the major difference being that interest rates are astonishingly lower for a home equity line of credit. Lower interest rates translate into lower monthly payments and shorter repayment times in comparison to credit card debts, making a home equity line of credit a very attractive option.

Interest Rates and Home Equity Lines of Credit

When choosing a home equity line of credit, one of the most important decisions is on what type of interest rate to base your loan on. There are two major types – variable and fixed rate. Variable rates can be enticing due to the low introductory interest rates, but borrowers looking to use a large amount of their home equity should be cautious when choosing a variable rate because interest rates can drastically change, making monthly payments that were once affordable very hefty.

Fixed rate mortgages are the preferred option for borrowers looking to use a significant amount of funds since it provides stable monthly payments.